Earn Less, Pay Less

Salary-based health insurance premiums could gain ground in the coming years as the federal health care reform law is implemented.

Despite ongoing challenges to the law, one issue keeping employers on edge is the law's play-or-pay feature. In 2014, it will require employers to offer employees affordable health insurance—or pay a penalty. Coverage is considered unaffordable if employee premium contributions exceed 9.5 percent of family income. The provision may have benefits specialists scrambling to revamp the way they calculate the amounts employees pay for their health insurance.

"There is a risk that contribution levels, as they stand today at many companies, are above the 9.5 percent household income threshold," says Steve Raetzman, a Mercer partner in Washington, D.C. One way to reduce contributions for lower-wage workers and avoid incurring penalties is to charge higher-paid workers more to offset the difference.

Pitney Bowes and General Electric have offered wage-based premiums for a couple of decades, but use of this system has stayed relatively flat overall. Ten percent of employers with more than 500 employees offer this benefit, according to Mercer's National Survey of Employer-Sponsored Health Plans, a survey of 2,844 public and private employers conducted late last summer and scheduled to be published this spring. Nine percent offered it in 2006. Play or pay, however, could bring increased attention to salary-based premiums.

Fairness Reigns

Executives at companies that have had this benefit in place for several years say fairness serves as a primary driver. Dwaine B. Duckett, vice president of human resources for the University of California, says school leaders noted back in 2003 that the continually rising trend in health care costs was having a harsh impact on lower-wage employees and they wanted to "soften the blow."

Pitney Bowes' leaders were driven by similar considerations. "Income shouldn't be a barrier to getting access to the same health care better-paid employees have," says Mary Bradley, director of health care planning at company headquarters in Stamford, Conn.

Not everyone agrees with this philosophy. Barbara S. Bauer, director of HR for OTTO Engineering Inc., an electronics designer and manufacturer in Carpentersville, Ill., doesn't support salary-based entitlements because she believes health care is a choice, not a right. She says a better approach is for corporate leaders to make health care affordable for all employees.

OTTO's 540 employees pay 21.31 percent of the total cost of their insurance. That's less than the national averages of 25 percent for single coverage and 27 percent for families, as calculated by the Kaiser Family Foundation.

Plan Structure

When structuring salary-based benefits, employers need to address these three issues: wages, health plans and coverage tiers, and formula calculations.

Wages.

Most organizations with salary-based premiums set wage ranges for employees. The University of California's 180,000 employees are split into four groups, based on annual salary:

$47,000 and below.

$47,001 to $93,000.

$93,001 to $140,000.

More than $140,000.

Menninger, a psychiatric and behavioral health care clinic with 400 employees in Houston, has offered wage-based premiums since 2003. It has three wage ranges, which are set by hourly rates:

$13.50 per hour and below.

$13.51 to $30 per hour.

More than $30 per hour.

Pitney Bowes, conversely, provides employees with flex dollars based on an individual's compensation. Workers who earn low wages receive more flex dollars to use in paying for health benefits.

Health plans and coverage tiers.

Employers typically base subsidies on the type of plan the employee chooses (such as a health maintenance organization, preferred provider organization or consumer-driven health plan) and the level of coverage (employee-only or employee and family, for example).

Formula calculations.

Employee contribution calculations are usually based on overall employer-employee premium ratios.

Officials at General Electric, based in Fairfield, Conn., set a cost-sharing target and consider affordability to determine premium amounts per wage band for its 120,000 employees. The University of California covers 87 percent of the total cost of premiums. FreedomRoads, a recreational vehicle retailer based in Lincolnshire, Ill., sets its ratio at 48 percent employer and 52 percent employee. Benefits specialists then work within wage ranges to find the right balance, says Dan Varela, SPHR, director of payroll and benefits for the 4,000-employee company.

Benefits specialists at Pitney Bowes calculate a base-level company subsidy and adjust it with a formula tied to an individual's base pay. Each plan and family tier structure is given a price tag based on the richness of plan benefits, and employees use their flex dollars to purchase the plan they want.

Pros

Besides fairness—and the looming possibility of play or pay—HR professionals say there are other reasons to provide this benefit. At Pitney Bowes, an increasing number of workers—who are often young and healthy—are signing up for coverage. Bradley notes that about 12,000 of the company's 20,000 active U.S. employees are new to their careers, primarily nonexempt males and often immigrants. "We struggle with health literacy with this population, trying to get them to understand the importance of purchasing medical benefits," she says. With education and the offer of wage-based premiums, this group's rate of enrollment is at 75 percent. That compares favorably to the companywide rate of 78 percent.

Offering different contribution levels can produce additional advantages. At FreedomRoads, "We wanted to be the best of the best in terms of the work environment. We wanted to offer benefits that gave us a competitive edge, helped us be a good employer and provided a socially responsible workplace," Varela says.

For lower-wage workers, the benefits of salary-based premiums are obvious.

Officials at Menninger have found that even higher-wage workers agree that the premium structure is a good idea and it is only fair that they should make a larger contribution to the health plan. It gives them a boost to know they are helping their colleagues, says Krishna W. Payne, SPHR, Menninger's director of HR.

Cons

Not all higher-wage employees are happy about salary-based premiums, especially if they represent a shift in the company's approach. When FreedomRoads introduced its plan, there was some negativity, mainly around total compensation. Some employees looked at private health insurance plans, Varela says. In the first year, about 2 percent of employees decided not to continue to receive coverage through the company."After that, we saw a sharp increase in the number of associates adding their families and spouses. Our enrollment has consistently increased 3 percent to 4 percent a year," Varela says.

The University of California's Duckett says, "People at higher levels will ask about the methodology from time to time," but he hasn't seen any type of concerted push back. "I think they realize that even though they are paying a bit more, they are still getting an excellent deal."

Another con: These plans are more complicated to administer, says Mercer's Raetzman.

Such complication may add to overall cost. At Pitney Bowes, where premiums are based on individual compensation instead of wage ranges, administrative costs are even greater.

In addition,salary-based premiums won't work for all employers. "Make certain you have the demographics to support it," Raetzman says. For instance, a ratio of 50 percent lower-wage and 50 percent higher-wage employees may be enough of a balance to compensate for lower premium contributions by lower-wage earners. On the other hand, a company with 90 percent lower-wage and only 10 percent higher-wage workers would have difficulty balancing the premium differences.

Further, section 105(h) of the Internal Revenue Code prohibits discrimination in favor of highly compensated employees in self-funded health plans. Pending further regulatory guidance, the health care reform law will extend the requirements to fully insured plans. The nondiscrimination rules could raise issues in the context of salary-based premium plans, depending on how an employer establishes the premium subsidy levels, says Sheldon Blumling, a partner in the Irvine, Calif., office of law firm Fisher & Phillips LLP. For example, some employees could be treated as highly compensated under a salary-based premium model—and pay higher premiums—even when they are not considered highly compensated under the 105(h) rules.

Employers also may find union officials reluctant to negotiate salary-based premiums. Duckett says the University of California unions got onboard. He suggests that employers emphasize the value of their plans—and fairness. "Come in with the premise that you want people to be insured and have access to health care," he says.

Not all union officials may be open to the idea, however. "Expect unions to resist it," Blumling says. "They are trying to get the best deal possible for their entire bargaining unit, no matter what the salary," he explains. Employers may want to introduce the program with their nonunion workforce and then offer unions an equivalent deal. That way, "Everyone in the same pay ranges—whether unionized or not—would get the same deal," Blumling says.

Communication

Communication about salary-based premiums is often just part of the mix of information employees receive during open enrollment, and the details may get lost.

Spotlighting the benefit separately can help introduce the approach and remind employees about the advantages of salary-based premiums. Start by making sure employees understand that the system is aligned with the company's general philosophy about benefits, says General Electric's Director of Health Benefits Ginny Proestakes. Be clear and transparent about your strategy.

Officials at FreedomRoads held education clinics for employees detailing what company plans offer and how they compare with private plans. Varela says the HR staff highlighted components of the plans that employees probably would not find in a private plan—no limits on chiropractic treatment and comprehensive pharmaceutical coverage, for example. "At first, a number of employees thought they could do better through Costco's medical program or other plans, so we provided them with a quick highlight about questions they needed to ask. Most, but not all, ended up remaining with our plan," Varela says.

While it's hard to predict whether the health care reform law will survive ongoing political and legal challenges, employers—especially larger, more complex organizations—shouldn't wait until the end of 2012 to figure out how they are going to provide affordable health insurance options, Raetzman says. Start looking at alternatives now, rather than trying to figure it out later and not having time to execute a plan in 2014.

The author is a freelance writer based in Tennessee.

Discuss Salary-Based Premiums

Do lower-paid workers at your organization pay less for health insurance than employees who earn more?

Is it a good idea?

Is it fair to higher-wage workers?

Is there a better way to make health insurance more affordable for all employees?